Timely payments of interest and principal of Treasury securities alongside delays in other federal obligations would likely result in legal challenges. On the one hand, the motivation to pay principal and interest on time to avoid a default on Treasury securities is clear; on the other, lawsuits would probably argue that holders of Treasury securities have no legal standing to be paid before others. It is not clear how such litigation would turn out, in part because the law itself imposes contradictory requirements on the government—requiring it to make payments, honor the debt, and not go above the debt limit, three things that cannot all happen at once.
If the debt limit binds, and the Treasury were to make interest payments, then other outlays will have to be cut by about 40 percent in aggregate. The need for the sharp cut reflects two factors. First, the government is running annual deficits: for fiscal year as a whole, CBO expects 22 cents of every dollar of non-interest outlays to be financed by borrowing. Second, infusions of cash to the Treasury from tax revenues vary greatly by month, and tax revenues in October and November tend to be fairly muted.
Thus, the required cuts to federal spending when an increase in federal debt is precluded are particularly large during these months. If Treasury wanted to be certain that it always had sufficient cash on hand to cover all interest payments, it might need to cut non-interest spending by more than 40 percent.
The extent of the economic costs of the debt limit binding, while assuredly negative, are enormously uncertain. Assuming interest and principal is paid on time, the very short-term effects largely depend on the expectations of financial market participants, businesses, and households. Would the stock market tumble precipitously the first day that a Social Security payment is delayed?
Would the U. Would there be a run on money market funds that hold short-term U. What actions would the Federal Reserve take to stabilize financial markets and the economy more broadly?
Much depends on whether investors would be confident that Treasury would continue paying interest on time and on how long they think the impasse will persist. If people expect the impasse will be short lived and are certain that the Treasury will not default on Treasury securities, it is possible that the initial response could be muted. However, even if the debt limit were raised quickly so that it only was binding for a few days, there would likely be lasting damage.
At the very least, financial markets would likely anticipate such disruptions as we approached the debt limit in the future. In addition, the shock to financial markets and loss of business and household confidence could take time to abate. If the impasse were to drag on, market conditions would likely worsen with each passing day.
Concerns about a default would grow with mounting legal and political pressures as Treasury security holders were prioritized above others to whom the federal government had obligations. Concerns would grow regarding the possibility of a recession triggered by a protracted sharp cut in federal spending. Worsening expectations regarding a possible default would make significant disruptions in financial markets increasingly likely.
That could result in an increase in interest rates on newly issued Treasuries. If financial markets started to pull back from U. Treasuries all together, the Treasury could have a difficult time finding buyers when it sought to roll over maturing debt, perhaps putting pressure on the Federal Reserve to purchase additional Treasuries in the secondary market.
An actual default would raise U. There would be consequences for the global financial system too. A default could trigger a wave of actions against borrowers who put up Treasury securities as collateral, leading to a debt sell-off and a damaging reduction in the availability of credit, Zames said.
The potential result, he said, was another recession. With the U. Some opponents of raising the debt limit argue that Washington could avoid defaulting by using incoming tax revenue to cover interest payments on U. There are at least two problems with the idea. According to a report from the Congressional Research Service , however, the Treasury Department insists that it has no authority to treat some payments as more important than others, even if it would be wise to do so.
Prioritizing payments because of a debt-limit impasse, the report said, could constitute the sort of action prohibited by the act, which bars the administration from delaying or withholding spending for policy reasons. A third issue is more practical.
As Treasury officials have said several times over the years, the department is not set up to pick and choose which obligations to pay.
So while it might be humane to prioritize retirement and disability checks, for example, or it might help avoid a global panic to prioritize payments on U. After a summer of criticism, political pressure on Kamala Harris eases — for now. Politics is a strange business. All the attention paid to Kabul and the coronavirus has taken some of the pressure off Vice President Kamala Harris, who spent the early part of the summer taking heat over the large increase of migrants heading to the U.
The House narrowly passed a bill on Sept. Republicans argue that the reconciliation bill offers Democrats the simplest way to raise the debt limit and avert a default. As direct as that path might seem, however, it includes some significant hurdles. The CBO estimates that in fiscal year which began on Oct.
What does it mean to raise the debt limit? To raise the debt limit means to allow the government to borrow more money to fund the programs currently in place. Congress must approve any increase in the limit to the amount of money the federal government can borrow in order to pay its debts.
Once the debt limit is raised, programs will receive funds and government employees and members of the military will receive paychecks. What does it mean if Congress fails to raise the debt limit? Included in that list are programs such as Social Security, Medicare and Medicaid, plus the paychecks of 1. The recent Child Tax Credit payments would be paused and funding for pandemic mitigation efforts would end.
Grants that states receive that cover things like school programs, Medicaid and public transit would dry up. Nearly a third of state spending nationally comes from the federal government. For instance, if an individual fails to pay his or her bills, they become a credit risk, meaning it is more difficult to borrow money because creditors are not sure they will be paid back.
The same things happen when a country cannot pay its bills.
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